"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury."
- United States Supreme Court in Gregory v. Helvering, 1935
The Bahamas government has announced that it plans to become fully engaged in tax reform and the centerpiece of that reform is the implementation of value-added tax (VAT). It has been suggested that, based on our experience with taxes, VAT is the preferred form of taxation which is being sought to increase public finances by at least $200 million per annum. The government has also suggested that it would simultaneously reduce import tariffs in consideration of its accession to the World Trade Organization. The debate has heated up and the temperature will likely increase significantly before a final decision is taken.
The government's efforts to sell its preferred VAT proposition hit a significant snag recently when the newspapers disclosed that the government's chief advocate for VAT had not paid taxes for the past 10 years on his personal property and for nearly twice as long for commercial property in a company of which he was an owner and director. This has resulted in some persons, mainly those in the opposition parties, calling for his resignation or, in the absence of such resignation, that he should be terminated.
Therefore this week we would like to Consider this... are Bahamians naturally averse to paying taxes and, in the context of a country that has grown an entire industry that boasts of being a tax haven, do we even recognize the difference between tax avoidance and tax evasion?
Tax avoidance
Tax avoidance is generally the legal exploitation of the tax regime to one's own advantage to attempt to reduce the amount of tax that is payable by means that are within the law whilst making a full disclosure of the material information to the tax authorities. Tax avoidance involves using tax deductions, changing one's business structure through incorporation or establishing an offshore company in a tax haven.
Tax evasion
By contrast, tax evasion entails efforts by individuals, companies, trusts and other entities to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities in order to reduce their tax liability including dishonest tax reporting, such as under-declaring income, profits or gains or overstating deductions.
The U.S. experience
Although the U.S. constitution specifically limited Congress' ability to impose direct taxation, deriving its funding primarily from taxation on goods, it was in 1861 during the Civil War that the first personal income tax was established. It levied a three percent tax on all incomes over $800.
In spite of some very substantial objections, in 1913 the 16th amendment to the constitution was ratified, providing Congress the "power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration". The maximum rate at that time was seven percent on incomes over $500,000. This rate would increase during World War I to 77 percent on incomes over $1 million and reached its highest marginal rate for individuals in 1952 and 1953 when it hit 92 percent.
It was certainly understandable, given those kinds of escalating taxation rates, that U.S. taxpayers would look for tax relief to be more formally defined. To that end, it was a U.S. Supreme Court decision that delineated the parameters of legal tax avoidance. In its decision, the court affirmed: "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Repeatedly, the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."
The Bahamian experience
The Bahamas has long marketed this jurisdiction from its earliest days as a tax haven with many tax-free exemptions. Later it became known as the more politically correct "offshore financial center" which included no personal or corporate income tax, no sales or value-added tax, no death or inheritance tax, no capital gains tax; in short, none of the regular taxes that are extracted in other jurisdictions. It seems we always held the view that taxes should be paid by others.
We seem to have always believed that we had a right to cheat the taxman, partly because we did not make the connection between the payment of taxes and the delivery of public services.
In addition, many people believe that politicians are either dishonest or corrupt and do not pay their taxes. Inspired by this belief and determined not to contribute to such nefarious undertakings, many citizens therefore do not feel compelled to pay the taxes that are owed. A classic example of this is the non-payment of customs duties, which we believe to be our inalienable right to evade.
Additionally, with the exception of National Insurance, there has also been little to no legal requirement for personal or public accountability by our citizens. Therefore, we have developed a culture where there was no appreciation or compulsion for the need to be tax compliant.
We now find ourselves at a significant national crossroads where there is an urgent need for increased government revenue and the growing realization that if we do not change course the country will be downgraded, with the attendant negative effects that will result from such an action.
An historic first
For the very first time in the nation's history, the government has invited its citizens to provide input both on the tax that should be implemented in order to increase public finances and also on the rate of such tax. This is a first for our democracy. When was the last time you heard of the political directorate inviting its citizens to comment on the type and rate of taxes that should be imposed on them?

What to do about tax evaders?
As noted, there has been considerable outcry that one of our citizens has not paid his taxes, with some suggesting that he should either resign or should be fired. For a brief moment, however, let us consider the far-reaching implications of such a reactionary suggestion.
Given our deeply ingrained national reluctance for being tax compliant, it is reasonable to assume that this situation is not unique to the individual who is currently making headlines, but is pervasive throughout our entire national psyche. Therefore, we need to seriously consider that if we start terminating the services of every public official who has succumbed to this national inclination, there just might be very few left.
Instead, this recent incident should serve as a warning to us as we proceed with reforming our tax regime. Given our national nature, we should be careful to ensure that the taxes established by this reformed regime should not be so overly burdensome and punitive that they will result in a high incidence of tax evasion. Otherwise, we will create a recipe for a high rate of failure and the proposed tax regime reform will not attain its desired goal of refinancing our nation's public finances and ultimately putting us all on a firmer footing for a flourishing future.
o Philip C. Galanis is the managing partner of HLB Galanis & Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.

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